Rational expectations that the government and the Bank of Japan will continue pursuing a weak-yen policy are said to be driving the yen's historic depreciation, with the effects of shifting production overseas and the Bank of Japan's asset composition also under discussion.
There is an argument that the Bank of Japan should raise interest rates to correct the yen's depreciation, and while the author broadly agrees with this view, the author argues that the relationship between price stability and currency stability is crucial. Currency policy should be conducted through cooperation between the government and the Bank of Japan, and under a managed currency system, the yen's value is understood to be determined by the strength of Japan's economy.
In the past, the yen's value was supported when Japanese companies converted into yen the foreign currency they earned through domestic production and exports. Today, however, production is increasingly shifting overseas and local profits are being reinvested there, reducing the flow of funds back to Japan. As a result, it is explained, the factors that once supported yen appreciation are no longer functioning as strongly as they did.
The effects of quantitative monetary easing have also complicated the relationship between price stability and currency stability within the framework of economic policy. More than 90% of the assets held by the Bank of Japan are Japanese government bonds, it is noted.